Property Investor Take Control Of Your Super
The ‘Global Financial Crisis’ (GFC) has left manyinvestors and pre-retirees’ dreams in tatters, disheartenby the returns of their superannuation fund over the lastfew years and still wary of the volatility of the sharemarket.
In most cases, people’s superannuation savings is theirnext biggest investment apart from their family home.Many of these people are asking the questions: how do Irecover from the GFC and how can I make my hardearned money work more effectively.
Two common strategies you can apply:
1. Take on a more risky investment allocation i.e.small cap companies; and/or
2. Borrow money to increase your investmentexposure.
People shell shocked by the sudden drop in theirsuperannuation balances have been driven to look at thesecurity of bricks and mortars. They could contemplateoption 2, but not option 1.Previously to invest in bricks and mortar throughsuperannuation you had to have all the money to makethe purchase, making it out of reach for most people.However, that all changed in September 2007, the rulesgoverning superannuation changed so that trustees ofsuperannuation fund could borrow to invest in an asset,such as property.For the average person, this could be achieved by using aSelf Managed Superannuation Fund (SMSF).
Investing in property using a SMSF
The strategy could be a great way to leverage your superannuation funds, assist you rebuild your wealth affected by the GFC and not to mention taking greater control of your superannuation assets. A non exhaustive list of reasons why you would consider the strategy:
- Be able to purchase an asset you could not otherwise afford;
- Pay 15% on capital gains if you sold and held the property for less than 12 months, otherwise it is only 10% and potentially 0% if the SMSF is inpension phase. Compared to up to 46.5% for assets held in your personal name. Potential massive tax savings.
- Pay only 15% tax on rental income as opposed to personal marginal tax rates of up to 46.5%.
- Utilise your 9% employer superannuation contributions to help you service the loan along with the rental income. If required you can make concessional contributions to make up any shortfall.These concessional contributions can be claimed as tax deductible items, which will assist in reducing your personal income tax liabilities.
- Interest costs associated with any borrowings are tax deductible, which will assist in reducing income taxes within the SMSF.
- Recent legislation changes reduced the maximum annual contributions each individual can make(depending on your age), which indirectly supports an argument that borrowing in SMSF is now potentially even more necessary. Put simply, borrowing is a means for people to increase the size of their superannuation assets if limited by the contribution rules.
Borrowing to invest in property through a SMSF can be asimple and effective strategy to leverage your existingsuperannuation balance.However, as the trustee of a SMSF, you MUST be awareof the hidden traps in getting the structure & financefacility correct, as the tax penalties can be severe andyou run the risk of being prevented from operating anSMSF in the future.
If you would like to learn more about buying property with self managed super funds. Attend our next seminar “The Complete Guides To Buying An Investment Property With Self Managed Super Funds (SMSF)”.
Author: Lex Villanueva (Financial advisor, Alliton Securities Pty LTd
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